Got That Portfolio Sinking Feeling?

It’s not just Russian admirals feeling a bit anxious today. One would hate to be giving Mad Vlad his Black Sea briefing papers this morning but the financial press seems to be causing angst in the private investor classes too. Arguably, both Putin and private investors are failing with outdated tools and strategies which date back to the early ‘80s. In Putin’s case his Black Sea flagship, Moskva, was commissioned almost 40 years ago, retired once in 1993, re-launched in 2000, upgraded with the best radar, comms, missiles, air defence and sonar in the Russian navy before being destroyed by two Ukrainian missiles last night. This was not supposed to happen.

Apparently, the distracted main radar system (tracking a drone) on Moskva had only a 180 degree coverage area, and the other defence radars/systems failed to pick up the tiny Neptune missiles skimming the waves in the stormy darkness. That failure to have 360 degree radar coverage has proven to be fatal and a battleship that once hosted George H. Bush and Mikhail Gorbachev for the 1989 Malta summit is now on fire and sinking slowly into the Black Sea. Enough of the maritime history but regular readers will know that history has usually provided a vital perspective in constructing an investment strategy. Not so, this time.

I have fielded more pension queries in the past few weeks than I have done in any time since the credit crisis and, in naval parlance, I am focusing on the 360 degree strategy rather than the torpedos. I have written previously about bonds not being able to provide the shock absorption features of traditional 60/40 portfolios but this article is not going to get bogged down in specific security selection and recommended asset allocations. Instead, I would like to expand on the ‘360 degree strategy’ to cope with the complex future promised by the following:

  • Interest rates are rising everywhere at a pace not seen since the Moskva first sailed.
  • This pace of change in interest rates is causing bond markets in 2022 to lose value in record amounts – up to $6 trillion of value has been lost since the market peaked in summer 2020.
  • There is a major international war in Europe for the first time since 1945 and arguably a proxy war between NATO and Russia for the first time ever too.
  • Technology and the digital economy has been a key driver of globalisation and financial markets but now faces a potential decoupling with China.
  • The planet is in a climate emergency. How sustainability/ESG impacts capital flows is still up in the air and awaits real direction ie should we focus on changing behaviours/impact or reward just the “good boys and girls”?
  • The internet is going through its 3rd generational iteration. Increasingly we read that companies without a Web3 or Metaverse strategy will struggle.
  • The economics of Web3 have spawned a whole new asset class. Digital assets like cryptocurrencies, NFTs and community tokens now have market capitalization levels in the trillions of dollars.
  • Public companies(equities) as a pool of opportunity is possibly shrinking. Jamie Dimon, CEO of JP Morgan, was recently highlighting that publicly listed companies have shrunk from over 7,000 to just 4,000 in recent years.
  • The corollary to the de-equitization of public stock markets is that private equity and venture capital has exploded in size and the number of billion dollar companies being created privately (aka “unicorns”) is running at an average of more than 10 each week.
  • Debt levels globally are still worryingly high and allows for little wiggle room if interest rates shoot higher. Watch Japan’s current financial gymnastics closely.
  • Inflation and ongoing pandemic interruption(Shanghai) capture most of the current headlines and could possibly trigger recession if not brought under control.

So, an increasingly complex world is facing new geopolitical and technological challenges while battling some more familiar foes like inflation and pace of digital change. That is not an easy risk cocktail for private investors and pensions which means potentially new thinking. As always, I try to look at ‘change’ and the data to support that perception. Here are three developments which are striking and might be a good way to illustrate my 360 thinking….

  • Not Boring: Not the emotion, the newsletter. I have often referenced the author Packy McCormick and his 100,000  subscribers in these pages eg. Axie Infinity, Solana, FTX etc. However, two years ago Packy launched Not Boring Capital which planned to invest in start ups and help tell their stories. Performance has been good but markets have been helpful. The activity, however, is staggering. Packy and his tiny team have invested $30 million in just over 200 companies. That’s like 2 investments a week!
  • Google: The Web2 search giant set up its own VC fund in 2009. To date it has invested in well over 1,000 companies with more than 200 exits. If we include funding/investments made by the core Google operations the deal numbers would suggest it’s investing style has been pacy, at more than 2 investments per week over 12 years. But Google can’t match our next leader in the speed stakes….
  • Tiger Global: We referenced these guys a few times in 2021 but Q1 2022 must have slowed the deal flow with Nasdaq/tech turmoil, Ukraine and China tensions all presenting execution challenges? Wrong. Tiger did more deals than ever before; it backed 120 unique companies in Q1 2022 which equates to closing nearly 2 deals per business day!

To be clear, my key focus is the number of deals being done not the pace ie I’m struck by the huge numbers of companies being backed. Obviously, speedier deal making helps build the portfolio faster but let’s consider something else. These leaders are looking at the future and trying to decide what sectors, technologies, metaverses, currencies and geographies are going to deliver returns on their capital. My sense is that there are so many technologies(robotics, materials science, space, quantum physics,blockchain etc) that these portfolio managers have recognized the difficulty in weighing up all the variables of complex systems and forecasting the future. Instead, they have tried to cover as many bases as possible. In classic portfolio management jargon this would be described as ‘diversification’. Me thinks that means something very different these days….

In particular, when start-up investors are weighing up the pros and cons of a specific investment opportunity they should remember what the leaders are doing. Even the relatively tiny Not Boring Capital is using a 360 degree strategy, deploying an average of just $150,000 per investment. Frankly, one cannot forecast the future so if it’s your pension portfolio or your private start-up portfolio forget about picking “winners” and try to cover as many trends and risks as possible. You just don’t know. The activity of the most informed people on the planet suggests they don’t really know either. Keep covering the bases and broaden your opportunity pool. Similarly, in the pensions space forget about trying to bet on value, growth, ESG, bonds, alternatives, gold, crypto, cash, quality, GARP, etc in isolation. Use them all and keep that risk radar on 360 at all times…..


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